11.6 Networks, Dynamics, and Behavioral Economics
We have examined how a monopoly behaves in the current period, ignoring the future. For many markets, such an analysis is appropriate. However, in some markets, decisions today affect demand or cost in a future period, creating a need for a dynamic analysis, in which firms explicitly consider relationships between periods.
In such markets, the monopoly may maximize its long-run profit by making a decision today that does not maximize its short-run profit. For example, frequently a firm introduces a new product—such as a new type of candy bar—by initially charging a low price or giving away free samples to generate word-of-mouth publicity or to let customers learn about its quality in hopes of ...
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